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Can someone explain why, if a few months ago the demand for oil was so great it was suggested to hit $200 a barrel, why has it dropped to below $120 today?

The reported reasons for the increases were China / Asia growth, but on the way down its Iran and the weather. Did I miss something when I was away.

Are we just being feed a lot of sh1t so investors can make more money.

Edited by statinstoinker

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Can someone explain why, if a few months ago the demand for oil was so great it was suggested to hit $200 a barrel, why has it dropped to below $120 today?

The reported reasons for the increases were China / Asia growth, but on the way down its Iran and the weather. Did I miss something when I was away.

Are we just being feed a lot of sh1t so investors can make more money.

Just another bubble to follow on from dotcom then houses.

A trader was on five live a couple of months ago saying that normally for every barrel of oil used three are traded ,at that time 28 were being traded for every one used .

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Are we just being feed a lot of sh1t so investors can make more money.

Exactly! Do not believe what the press are telling you.

Demand from China is predictable and does not explain the massive rise in price that we have seen over the last year.

There is no shortage of supply or we would have ques of cars at our petrol stations.

The head of a hedge fund appeared before congress in America. He was asked - are institutional investors driving up the price of oil? His answer was a catagorical YES!

So it is just speculation that is driving the price of oil. Now can anyone tell me another market where speculation drove the price up? ;)

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So it is just speculation that is driving the price of oil. Now can anyone tell me another market where speculation drove the price up? ;)

Ooh me sir, me sir <waves hand in air>. Is the it the housing market sir?

Edited by crash_bang_wallop

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As with other comments above I agree it appears much of the rises appear to be speculation. I think I also heard it mentioned that many of the Asian countries subsidized their oil and have removed/reduced these subsidies as it was costing so much which has resulted in a reduction in demand as well as the slowing economy in the US leading to reduction in demand as well . I am sure there is probably an oil price thread elsewhere on the board, though some times I'm scared to venture outside of our cosy NI section! :lol:

Edited by FrustratedFTB

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As with other comments above I agree it appears much of the rises appear to be speculation. I think I also heard it mentioned that many of the Asian countries subsidized their oil and have removed/reduced these subsidies as it was costing so much which has resulted in a reduction in demand as well as the slowing economy in the US leading to reduction in demand as well . I am sure there is probably an oil price thread elsewhere on the board, though some times I'm scared to venture outside of our cosy NI section! :lol:

the rise in oil prices on the graph below looks very similar to our own housing bubble imho , and as we know all bubbles burst ;)

oilparabolic1.png

post-15519-1217930071_thumb.png

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back in june the price of oil jumped 11 odd dollars in 1 day.....nothing to do with the fact that if the price had stayed at the low level then a large amount of traders would have been facing a multi million dollar loss.....says it all really....speculation to make money and nothing to do with shortages imo

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Exactly! Do not believe what the press are telling you.

Demand from China is predictable and does not explain the massive rise in price that we have seen over the last year.

There is no shortage of supply or we would have ques of cars at our petrol stations

We have no queues - but the 3rd world has been priced out of the market. So the shortage is evidenced here by higher prices. And higher prices theoretically lead to demand destruction - which should lower prices - is this why the price has dropped? And could this be why no one ever gets it right?

Edited by yadayada

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name='Belfast Boy' post='1244558' date='Aug 5 2008, 10:14 AM']Exactly! Do not believe what the press are telling you.

Demand from China is predictable and does not explain the massive rise in price that we have seen over the last year.

There is no shortage of supply or we would have ques of cars at our petrol stations

We have no queues - but the 3rd world has been priced out of the market. So the shortage is evidenced here by higher prices. And higher prices theoretically lead to demand destruction - which should lower prices - is this why the price has dropped? And could this be why no one ever gets it right?

I bought oil at circa 60, and sold a short at 145 USD, I called it live on this board. I ll close this short circa 100 USD and buy again. I think oil will go to between 300-500 USD in the next 5-10 years.

Speculators had very little to do with the price rise.

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I bought oil at circa 60, and sold a short at 145 USD, I called it live on this board. I ll close this short circa 100 USD and buy again. I think oil will go to between 300-500 USD in the next 5-10 years.

Speculators had very little to do with the price rise.

I'm not willing to make any specific price prediction, but I'm willing to bet the farm that it'll be a lot higher than today. That's the farm where yields are going to be low due to the extreme price of gas derived fertilizer.

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Exactly! Do not believe what the press are telling you.

There is no shortage of supply or we would have ques of cars at our petrol stations.

Its not a hard sum. This year its worse too, sure there is supply but there is a tightness that cannot be disputed

consumption_by_region.jpg

global_production.jpg

The head of a hedge fund appeared before congress in America. He was asked - are institutional investors driving up the price of oil? His answer was a catagorical YES!

You are refering to Michael Masters and there are bits of truth in what he says, the basic facts he presents are accurate, but his analysis is very one sided.

He also failed to see the bigger picture – namely that rising prices change the incentive structure of the underlying physical markets, encouraging new supply. This is simple logic. There are two sides to every contract, so for every buyer there must be a seller. Regulations require availability of the underlying physical commodity to every contract; moreover, futures contracts must clear every month. So yes, the surge of financial interest has contributed to price increases, but it has also has incentivized new supply of the underlying commodities to come to the market. The is most evident (so far) in crude oil, which began to rally earlier than most other commodities.

The rapid expansion of financial contracts since 2004 has led to a large increase in physical stockpiles—i.e. building new tanks to store oil so that the owners can underwrite futures contracts. That, in turn, has deepened the market and now serves as a buffer against potential supply shocks, which is an unequivocally good thing.

Once the supply response satisfies demand, prices will ease (although they will likely remain higher than before to reflect the cost of higher cost structure of marginal producers and increased storage costs). But these broad, structural changes would never occur if high prices did not incentivize new supply from coming to the market.

This is where the peak oil arguement comes in, its not about running out of oil. Its the fact that we have peaked our rate of production. Also consider this: We don't have the supply, We don't have the personnel, We don't have the materials, We don't have the rigs, We don't have the refineries, We don't have the pipelines and most importantly we don't have the discoveries

So it is just speculation that is driving the price of oil. Now can anyone tell me another market where speculation drove the price up? ;)

You cant short the housing market, so there is one side of the speculators wiped out

The single biggest contributor to the rising price of commodities is the falling value of currencies, in particular the dollar

The following is a snippet from a CFTC Fact Sheet

CLAIM

Speculative traders’ interest in crude oil now account for roughly 70% of all trading in West Texas Intermediate crude on the New York Mercantile Exchange, compared with 37% in 2000.

FACTS

• The 70% figure includes swaps dealers in the speculative category and includes the long and short positions of both swaps dealers and speculators without netting the positions.

• It is important to note that much of swaps dealer activity involves commercial hedging and risk management. This is airlines freight companies etc

• According to CFTC data, swaps dealers as a whole are close to flat in the crude oil markets – meaning they are almost equally long and short in the marketplace.

nymex_crude_oil_futures.jpg

nymex_wti_crude_oil_2006_2008.jpg

• Traditional speculative positions (in this case, “speculators” minus the swaps dealers positions) include long and short positions – in fact, there are almost as many short speculative positions as there are long positions.

ymex_crude_oil_futures_net_positions.jpg

• Speculative positions have not been increasing during the past year. The net-long positions of non- commercials is currently around 100,000 which is the lowest it has been in about a year.

The cftc is due to publish a more indepth report to congress on 15th of september

Speculators are being blamed for the the rising prices, but it is neither here nor there because there is a fundamental problem which i believe will evolve into a crisis.

The price will correct due to demand destruction as Yada stated, and in a contracting economy this is normal. It may correct for as long as it rose, it may fall as low as $80 a barrell if it breaks $100. Personally i will be backing the truck up if it gets to this level. It has already seen nearly $150/ b so second time round will be easier. Dr Bubb likes to call this his "once trodden path"

Anyone interested should read this book Matt Simmons is the only person to do a comprehensive study on this subject and his conclusions are horrific

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I bought oil at circa 60, and sold a short at 145 USD, I called it live on this board. I ll close this short circa 100 USD and buy again. I think oil will go to between 300-500 USD in the next 5-10 years.

based on your prediction do you have a view on a price point for oil where alternatives become economically viable ?

i am not convinced that renewables like wind and solar will ever be significant , and think we may see a return to legacy energy production such as steam and water . along with a new generaion of nuclear .

probably not popular with the green lobby however i think come the day when it's a choice between being green and freezing in the winter the majority will throw more coal on the fire .

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I bought oil at circa 60, and sold a short at 145 USD, I called it live on this board. I ll close this short circa 100 USD and buy again. I think oil will go to between 300-500 USD in the next 5-10 years.

Speculators had very little to do with the price rise.

I agree, though i didnt play it this time (learning about it). I did play natural gas though and sold on the way up, its looking juicy again

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I agree, though i didnt play it this time (learning about it). I did play natural gas though and sold on the way up, its looking juicy again

so you guys would be speculators then ? :lol::lol:

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i am not convinced that renewables like wind and solar will ever be significant , and think we may see a return to legacy energy production such as steam and water . along with a new generaion of nuclear .

I'm not so sure about wind, but as far as i'm aware, solar is hugely underdeveloped - the sun is easily the most abundant energy source we have. Apparently artificial photosynthesis is the way forward - anyone know anything about it?

Edited by shipbuilder

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so you guys would be speculators then ? :lol::lol:

Yes. But the combined position of all private investors is a pee in the ocean compared to the size of the market. The point is that speculators are both long and short, the problem of supply and demand remains. If speculators were the only factor there would be billions of barrels of oil surplus.

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And one might assume that here in lil' old NI we might not be exposed to the price of oil.

Well besides the usage from transport which is obvious, check out this map

ni_energy_map.jpg

What happens when oil goes to 200, 300, 400?

There is no Plan B....either we pay for it or face doing without.

There will be blood................ :lol:

post-9432-1218063111_thumb.jpg

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And one might assume that here in lil' old NI we might not be exposed to the price of oil.

Well besides the usage from transport which is obvious, check out this map

ni_energy_map.jpg

What happens when oil goes to 200, 300, 400?

There is no Plan B....either we pay for it or face doing without.

There will be blood................ :lol:

I looked at that map,look at our extensive rail network, we don't need cars. :lol: Must ask my uncle if he still has that donkey. :unsure:

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I bought oil at circa 60, and sold a short at 145 USD, I called it live on this board. I ll close this short circa 100 USD and buy again. I think oil will go to between 300-500 USD in the next 5-10 years.

Speculators had very little to do with the price rise.

sorry but totally disagree with you there. Rice/Wheat are speculated and traded in the same way as oil...guess them food riots in the far east are just a figment of someone's immagination then....nothing to do with the fact wheat has more than doubled in 12 months.

Traders/Speculators to the oil price are like petrol to a BBQ imo

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Yes. But the combined position of all private investors is a pee in the ocean compared to the size of the market. The point is that speculators are both long and short, the problem of supply and demand remains. If speculators were the only factor there would be billions of barrels of oil surplus.

If you see money in speculating on oil, then so do hedge funds. They have the money to move any market.

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sorry but totally disagree with you there. Rice/Wheat are speculated and traded in the same way as oil...guess them food riots in the far east are just a figment of someone's immagination then....nothing to do with the fact wheat has more than doubled in 12 months.

Traders/Speculators to the oil price are like petrol to a BBQ imo

Subby what is your opinion based on? Riots mean speculators and the price doubled in 12 months? That means you assume it is speculators?

Rice by the way is not traded on a futures exchange...so I dont know where you the speculators from that side of things?

I can assure you speculators have very little to do with the rising prices...

The media and the politicians and the scapegoaters like to blame speculators. Its a politically palliative measure. They don't understand how futures markets work and they don't understand basic fundamentals of supply and demand, never mind,understanding price volatility in a tight market, econometric of models of how price behaves in a market where supply and demand are tight, and whether or not commodity prices are driven more by supply or demand.

Let me explain....

The suggestion that speculators are pushing up the price means that the price is an artificial one out of all proportions to the fundamentals of supply and demand. In that case if the price was an artificial one then we should see excess supply, and stocks/inventories building,as the higher price curbs demand and and higher margins for producers lead to more investment in production as margins are not squeezed. This leads to supply rising, and demand destruction which will lead to falling prices.

What is a speculative bubble?

I like to define a bubble where we get an excessive supply of something relative to what the market can absorb.

Lets take a look at some examples...

The US housing market is/was a bubble. Check out the chart below herepost-13039-1218195932_thumb.jpg, working from right to left top first. You can see that as house prices went up in the US, that the supply of empty houses on the market went up in tandem with the prices. This shows that there was excessive supply relative to what the demand could absorb. Now that the supply lifeblood (credit) has been taking away, we now have a reduction in demand and an excessive supply of houses on the US at its highest level since 1982.

The Tech Boom ending in 2000. At one point one google stock was worth 2 times more than a computer, a yahoo stock was worth more than the cost of a computer. Any rationality would tell us that when one stock was worth more than the product that their business depended (computers) on then we had an unsustainable business model at those stock valuations.

We had 1000's of dotcome companies who had no earnings, PE's of 70. The excessives were proven right by the market as the the over supply of these dotcome start ups went bust in there 1000's. Then we had a 75% decrease in valuation of the stock prices. This was a speculative bubble.

In Japanese real estate in 1990, the land in central Tokyo was worth more than all the land in California. This was a speculative bubble.

Northern Ireland house prices. We can see with the rising number of pages on property news pages(rising supply), the viewing numbers are down 90% from a year, and the supply of credit which is the supply side of the housing market as they are totally dependent on credit has been contracted. Now we have falling prices, abandoned construction sites all over the country, bankrupt developers and so on. This was a bubble.

I ll do a fundamental analysis of wheat to show my view point between what is truly a tight market and a true speculative bubble like we had in the above examples...

Fundamental Analysis of Wheat analyst of Price rise

As opposed to the example of real speculative bubbles above, wheat exhibited none of the above traits to signify an artificial price due to speculative activity. Lets analyse it.

Supply Side

There are many components on the supply side that have led to higher prices...

Check out the chart below, 2nd from left.post-13039-1218197048_thumb.png This shows that the number of acreage dedictated to wheat farming. The chart shows the decreasing acreage for 27 years. The land for wheat farming is near historic lows. So by future tightening of supply, we have no potential excess in this component.

Next we have ending stocks,ie, wheat stocks that are almost ready to come on the market. The next chart post-13039-1218197472_thumb.png 3rd from left shows how the number of ending stocks has been in a steady trend of decline.

Next chart post-13039-1218198206_thumb.png 4th from the left shows that world ending stocks have dropped 50% in recent years. This supply side fundamental shows a more imminent shortage of wheat. This will be quickly factored in to near term price volatility.

Next on the supply side fundamentals we have a production of wheat/usage chart.post-13039-1218198745_thumb.png The chart shows that production of wheat in 2007 was still lower than in 1996. The black line shows usage rate which has been converging away from production. We have had more often that not wheat shortages in the last number of years. This shows completely the opposite of excessive supply which we would expect to see in a bubble. We have deficits in production to usage. No excessiveness here

The next chartpost-13039-1218214232_thumb.png 5th from left)shows production and the yellow area show beginning stocks of wheat. Beginning wheat stocks have been falling for years, which shows longer term supply side problems as opposed to ending stocks declining showing near term supply side problems. No excessiveness here

6 th chart post-13039-1218213405_thumb.png from the left shows the yield from a wheat crop. The yield has been below trend and had been declining for a few years. This shows that with falling supplys, falling ending and beginning stocks, falling acreage and a falling yield on the existing stocks that wheat is far from an excessive commodity like housing, techstocks etc.

I cannot see one bearish fundamental on the supply side for wheat.

Demand Side

According to the supply side analysis of wheat the only thing that could prevent a sharp price rise in wheat is if demand fell much faster than the supply side. However, check out the 7th chart post-13039-1218199444_thumb.png from the right...It shows that we have been having a steady increase in price and consumption of wheat, as world GDP always grows somewhat...

As the fundamentals go, falling supply and rising demand means higher prices.

Look at the 8th chart post-13039-1218214470_thumb.png from the left. It shows that stocks/usage ratio in 2007 reached 10%. This is the lowest in history. We have the lowest inventories of wheat now than ever before. No excess hear. At a 10 stocks/usage ratio if world wheat production stopped today, we would only have enough ready wheat to feed the world for 30 days.

Also when world wheat prices doubled from 500 USD to 1000 USD, world consumption and production were roughly at 700 million metric tonnes. It shows that supply did not increase and demand destruction did not occur at these prices. Therefore the price was in equilibrium with the fundamentals. If the price was artificial we would have seen something like supply 700 million tonne to consumption 500 million tonne, an excess surplus, meaning an unjustified price, and then the price would have fallen...to correct the imbalance.

And on the demand side at current rate of population growth we have 77 million new mouths to feed each year on this planet.

guess them food riots in the far east are just a figment of someone's immagination then....nothing to do with the fact wheat has more than doubled in 12 months.

Reasons why prices shot up

Econometric models show and future market price action shows also, that the closer together the supply and demand lines move to each other the more volatile the prices. When the supply and demand curves cross, we can get huge price movements, as commercial business run into the market to hedge themselves against higher prices. The CFTC report shows that commercials ie, people who use wheat, farmers, Kellogs were net long. I dont eat cornflakes or wheat flakes but I assume the price of cornflakes didnt increase from £3 to £9.

For example, lets say we have tight supply and demand lines, like in wheat. Well a 1% decrease in supply and a 1% increase in demand can lead to a proportionately large rise in price, perhaps a 1% decline in supply can lead to a 10% movement in price. Combine that with a 2% increase in demand and we can add another 10% on the price.

Commodities are Supply Side Driven

Price spikes in commodities are driven by supply side shocks. Whether or not you believe in global warming or not extreme whether is happening in places where we grow food. A hard frost, a hurricane, drought can lead to lost crops. There were supply side shocks in wheat, this can lead to volatile price spikes.

guess them food riots in the far east are just a figment of someone's immagination then

Wheat is competed for in the global market. The countries where the riots were are dollar pegged countries. However, their per capita income is much lower than other countries who compete for wheat on the global market with them. The USD has been devalued also, which of course is another factor in the large price movements. These countries maintain their peg by printing money to buy dollars. So riots were symptomatic of a low per capita income country, with a dollar peg competing on a market for a globally used commodity.

Sorry Subby if I seem like a pedantic smarta*se :) , but I do study this and I genuinely hate when politicians and vested interest groups and media feed us with misinformation. The ironuic thing is they couldnt spot a bubble when it was real, and now there isnt a bubble they shout "bubble"

The reason being that rising house prices were in their short term interests and the public were enjoying buying new cars and getting "illusory wealth"...so why spoil the party? Pour more punch infact...

However, now we have rising food costs and a burst asset bubble, the public dont like it, and they turn to the government. So the government defer the heat from themselves onto some othe scape goat. Very convenient.

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Edited by VedantaTrader

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